USDA Reports Review

USDA Shocks Corn World, Market Yawns

Chinese Census data showed that, over the past 10 years, Chinese corn production has been a cumulative 297 million metric tons (mmt) larger than either internal Chinese government agencies or USDA was showing. (Chart by Alan Brugler)

USDA dropped a bomb on the corn world Thursday.

What did USDA do? The folks who compile the World Agricultural Supply and Demand Estimates (WASDE) report took note of China's total overhaul of its crop data and USDA raised its estimate of China's carryover stocks by 5.8 billion bushels in one stroke of the computer keyboard.

Before anyone has a heart attack, we'll peek at the last page of the chapter where corn futures actually closed 1 1/4 cents per bushel higher Thursday, with full knowledge of that change. But let's look at what happened in more detail.

China had not issued its usual ag numbers in October, citing "technical issues." At the time, some thought this was withholding of data and somehow related to the U.S.-China trade war. However, it now appears that they knew the numbers were way off. The Chinese recently completed their third national agricultural census. That is on a 10-year cycle, just like the U.S. census. The numbers were actually published in late October, but just recently highlighted by the China National Grain and Oils Information Center (CNGOIC) in its monthly report.

The Chinese census data -- actually tabulated by the National Statistics Bureau, or NSB -- showed that, over the past 10 years, Chinese corn production has been a cumulative 297 million metric tons (mmt) larger than either internal Chinese government agencies or USDA was showing. That's 11.69 BILLION bushels that wasn't in the official data! Corn production for 2017 was revised upward to 259 mmt from 215.9 mmt.

You don't just hide 11 billion bushels of extra production. As is true with U.S. numbers, feed and residual use is a bit of a shock absorber for any production misses. After all, our informal definition of "residual use" is: "It's gone, and we don't know where it went." The Chinese census data showed heretofore unknown feed and residual use of 141 mmt over that 10-year period (5.55 billion bushels). Obviously, production was outstripping consumption over the full 10-year period, so some hidden stocks had to be reported.

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The shocker Thursday morning was WASDE putting Chinese corn ending stocks for 2018-19 at 207.49 mmt (8.17 billion bushels) versus the previous estimate of only 58.5 mmt in October. Yes, China now appears to have 149 mmt more corn in inventory than was thought to be the case in October. That's a whole mountain range of corn piles!

Why didn't the corn market sell off on the news that there are 5.86 billion more bushels out there? There are several plausible reasons for looking past the bearish numbers.

1. CNGOIC had leaked the numbers prior to USDA's report Thursday. The trade had some idea it was coming.

2. Industry sources for years have argued that the NBS numbers -- and thus the U.S. numbers -- were understating Chinese production and stocks. One private firm has been suggesting an additional 100 mmt of extra stocks for years. They were finally vindicated when the NBS released their update.

3. Probably the most important factor is that this unknown corn was not moving in international trade and likely not very far internally in China. It wasn't available to the world export trade, and China hasn't been importing corn for several years, so it hasn't been a price influence. We now know that one reason China wasn't importing (and was putting tariffs on ethanol and DDGS before that was fashionable) was because of this extra internal buffer stock. Those surprise stocks are thought to mostly be in the high-production northeast corner of the country.

4. Want a fourth reason? Chinese corn stocks are still tightening, just from a higher level. USDA is projecting that they will drop 15.1 mmt in 2018-19, from 222.5 mmt to 207.5 mmt.

IMPLICATIONS

China is a bigger corn producer than we thought, but also a larger user. Stocks are still tightening -- they just have a bigger buffer. The new data quashes the idea promoted by some that China would need to import either corn or ethanol by 2020 due to tightening stocks. They might still have to, but it would take a major drought.

From a world perspective, corn prices should still be well supported. We look at the world corn stocks-to-use ratio for guidance on price. Tighter stocks correlate well with higher cash average prices. If you remove Chinese stocks because they don't move in international trade, and remove U.S. stocks, you get a measure of how tight corn supplies are for the rest of the world. That also measures U.S. export opportunity.

Since the corn from these Chinese revisions is assumed to remain in China, the bushels do little to change the narrative on U.S. exports for the first half of the 2018-19 marketing year. The global corn stocks-to-use ratio ex-U.S. and China is still projected to be the tightest since 2012-13 at 8.87%.

There is one caveat: while older Chinese corn stocks were accumulated under a much higher price support structure (think $9), the 2018 production is supported much closer to world market values. It COULD move into export channels if anything happens to drive up world corn prices into the high $4s or low $5s. All this newly discovered corn is unavailable today, but not necessarily forever.

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Alan Brugler

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